You're ready to buy a home, but the idea of making mortgage payments for the next three decades may not be an attractive prospect for you. You prefer the idea of owning a home free-and-clear in the shortest possible time. Unfortunately, in a post-financial-crisis world, mortgage options have become limited. But, on the flip side, it's not difficult to turn any mortgage into a short-term-equity-building machine.
Available Mortgage Terms
At the time of publication (Oct. 2012), U.S. mortgage lenders offer home loans with terms of 15, 20 or 30 years, making 15 years the shortest available mortgage. The 15- and 30-year terms are the most commonly offered, while the in-between 20-year mortgage can be found by digging through different mortgage lender offerings. A short-term, 15-year mortgage has a lower rate than a 30-year loan.
If you see adjustable rate mortgages (ARMs) quoted as a 5/1 ARM, 7/1 ARM or just 5-year ARM, the year period indicates for how long the initial interest rate will stay in effect. Adjustable-rate mortgages typically have a 30-year term, so a 5-year ARM would have a fixed rate for the first five years and an annually adjusted rate for the next 25 years.
Benefits of Short-Term Mortgages
The USA.gov website recommends going with the shortest possible mortgage to save money over the "shorter" long term. As a comparison, a 30-year, $200,000 home loan at 4.5 percent will result in $165,000 of interest paid over the full term of the loan. If, instead, you chose a 15-year loan with a 4 percent rate, the total interest paid drops to about $66,000 -- almost $100,000 in interest savings. Going with the shorter term -- 15-year -- loan allows you to pay off the loan in half the time with less than a 50-percent increase in the monthly payment.
DIY Short-Term Mortgage
If you think a 15-year mortgage is much too long to be paying on your home, it is not difficult to set up a do-it-yourself shorter-term loan. Start with a standard 15-year mortgage and make larger payments each month. The extra payment amounts will reduce the principal and pay the loan off faster. Plug your loan amount and interest rate into a mortgage calculator and select a 10-year term to calculate a payment amount. As an example, on the $200,000 loan at 4 percent, increasing the payment from $1,480 up to $2,025 effectively turns the loan into a 10-year term. If you plan to get a mortgage and pay it off quicker, though, make sure the loan does not have any prepayment penalties.